2022 (4) TMI 1607 - AT - Income Tax

Assessee wins appeal against share capital additions under sections 68 and 56(2)(viib) following Rule 11UA(a) valuation requirements

ITAT Delhi allowed the assessee's appeal against additions under sections 68 and 56(2)(viib) relating to share capital and premium received. The court ... Addition u/s 68 - enhancement of income u/s 56(2)(viib) - share capital and share premium received - identity and creditworthiness of the of the investors and genuineness of the transaction not proved - addition on protective basis by invoking the provisions of Section 56(2)(vii)(b) by CIT(A) HELD THAT:- For protective addition u/s 56(2)(vii)(b) Identical issue had come-up before the Tribunal in assessee’s own case for the immediately preceding assessment year [2021 (3) TMI 459 - ITAT DELHI] to hold that the Ld. CIT(A) was not justified in making the addition of Rs.42 lakhs on protective basis by invoking the provisions of Section 56(2)(vii)(b) as held assessee has valued its shares as per the valuation certificate issued by the chartered accountant. Although the said valuation report was submitted before the AO to justify that the shares issued by the assessee was at fair market value, it was computed in accordance with Rule 11UA(a) of IT Rules, 1962, however, as we find, the AO rejected the same holding that the assessee is not having any worth of receiving any share premium. He has ignored the various assets shown by the assessee in the balance sheet such as cash and cash equivalent, - short-term loans and advances and other current assets - AO did not apply the formula provided in Rule 11UA and did not make any attempt to compute the value of shares of the assessee in accordance with Rule 11UA of IT Rules, 1962 which has been upheld by the ld.CIT(A). Thus when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. It has been held by Hon’ble Supreme Court in the case of A.K. Roy vs. State of Punjab [1986 (9) TMI 412 - SUPREME COURT] that where a statute requires to do a certain thing in a certain way, the thing must be done in that way or not at all. Other methods or mode of performance are impliedly and necessarily forbidden. Assessee has issued the shares at fair market value computed in accordance with Rule 11UA(a) of the IT Rules 1962 and no fault has been found in the method applied by the assessee and the lower authorities have made the addition u/s 56(2)(viib) purely on presumptions and surmises. For addition u/s 68 - As assessee has filed the requisite details to substantiate the identity and creditworthiness of the share applicants and genuineness of the transaction. Nothing has been brought on record to negate the various evidences filed by the assessee. A perusal of the audited balance-sheet of these Investor Companies shows that these companies are having sufficient capital and reserves to make the investment in the assessee company and the entire transactions have been made through banking channel. Merely because the Investor Companies have shown meager income during the impugned assessment year, the same in our opinion, cannot be a ground to doubt the creditworthiness of the said company especially when the said company is having sufficient funds in its account in shape of share capital and free reserves. Since the assessee in the instant case has proved the identity of the investors and filed sufficient details to substantiate the creditworthiness and genuineness of the transaction, therefore, respectfully following the decisions M/s. Priyatam Plaschem Pvt. [2018 (8) TMI 980 - ITAT DELHI], Real Time Marketing (P) Ltd. [2008 (4) TMI 8 - HIGH COURT OF DELHI] hold that the Ld. CIT(A) was not justified in confirming the addition made by the A.O. under section 68. Appeal of the Assessee is allowed. Issues Involved:1. Delay in filing the appeal.2. Addition of Rs.48 lakhs under Section 68 of the I.T. Act, 1961.3. Addition of Rs.42 lakhs under Section 56(2)(viib) of the I.T. Act, 1961 on a protective basis.Issue-wise Detailed Analysis:1. Delay in Filing the Appeal:The assessee filed an appeal with an 18-day delay. The Tribunal considered the condonation application and the accompanying affidavit explaining the reasons for the delay. After hearing both sides, the Tribunal condoned the delay and admitted the appeal for adjudication.2. Addition of Rs.48 Lakhs under Section 68 of the I.T. Act, 1961:The Assessing Officer (A.O.) noted that the assessee company received Rs.42 lakhs as share premium on 60,000 shares. Notices under Section 133(6) were issued to verify the identity, creditworthiness, and genuineness of the investors, but no response was received. Consequently, the A.O. added Rs.48 lakhs to the assessee's income under Section 68 of the I.T. Act, 1961, citing unexplained cash credits.The assessee contended that the amounts from Kuber Buildmart and Texcity Construction Pvt. Ltd. were received in earlier assessment years (A.Y. 2013-14 and A.Y. 2014-15, respectively) and only the shares were allotted during the current year. The assessee provided extensive documentation, including income tax returns, financial statements, and valuation reports, to substantiate the transactions. The Tribunal found that the assessee had adequately proved the identity and creditworthiness of the investors and the genuineness of the transactions. The Tribunal noted that the lower authorities had not sufficiently countered the evidence provided by the assessee. Citing precedents, the Tribunal concluded that the addition under Section 68 was not justified and deleted the addition.3. Addition of Rs.42 Lakhs under Section 56(2)(viib) of the I.T. Act, 1961 on a Protective Basis:The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the addition under Section 68 and also added Rs.42 lakhs under Section 56(2)(viib) on a protective basis, arguing that the share premium received was in excess of the face value and should be treated as income. The assessee argued that the valuation of shares was done in accordance with Rule 11UA of the I.T. Rules, 1962, and provided a valuation report indicating a fair market value of Rs.80 per share.The Tribunal referred to its previous decision in the assessee's own case for the preceding assessment year, where a similar addition was deleted. The Tribunal emphasized that when a statute prescribes a particular procedure, the authorities must follow it. The Tribunal found that the valuation report submitted by the assessee was in compliance with Rule 11UA and that the lower authorities had erred in rejecting it without proper justification. Consequently, the Tribunal held that the addition under Section 56(2)(viib) was not warranted and deleted the protective addition of Rs.42 lakhs.Conclusion:The Tribunal allowed the appeal, setting aside the orders of the lower authorities and deleting the additions made under Sections 68 and 56(2)(viib) of the I.T. Act, 1961. The Tribunal's decision was based on the assessee's compliance with statutory requirements and the lack of sufficient counter-evidence from the revenue authorities.